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What Fastest Growing Emerging Economy (India) Really Mean?

What is GDP?

Gross domestic product or simply GDP is the market value of all goods and services produced in an economy in a specific period– a quarter, a year and so on. In most countries a major share of economic production is for self-consumption and hence GDP gives an idea of the general standard of living. When articulated in the current exchange value of US dollars, India is the world’s seventh largest economy.

Is India among the world’s fastest growing economies?

IMF estimates for GDP growth at constant prices show India should grow at 7.4% in 2018. This is the world’s seventh highest rate. The growth rate alone, however, is a misleading indicator as even a small absolute change in the economies of countries with a low GDP base will inflate the percentage figure.

Isn’t Indian economy the fastest growing?

Among the ten largest economies, India is expected to grow at the fastest rate in 2018. But because of the difference in overall size, growth rate alone can be misleading.

How much do large economies add in absolute terms?

Despite growing at a slower rate as compared to India, China, the US and Germany will add far more to their economy. China is expected to add $1,181 billion to its economy at current prices — 5.5 times India’s addition. The US is estimated to have added $838bn, and Germany $283bn, compared to India’s $215bn in 2017-18.

But isn’t over 7% growth rate a significant achievement?

Any improvement in the growth rate is good. But a better yardstick to measure quality of life in various countries even in purely economic terms is GDP per capita, or GDP divided by the population. By this yardstick India stands nowhere compared to other large economies. US’s per capita GDP (larger economy, lower population) is more than 32 times India’s. China has a larger population but its per capita GDP is five times India’s. To significantly increase its GDP at per capita level India will have to maintain double-digit growth for many years and hence 7% is a modest achievement.

Why is GDP at times expressed in purchasing power parity (PPP)?

It is standard practice to convert GDP to US dollars for international comparisons. Economists, however, point out that currencies of developing countries have a higher purchasing power in their domestic markets than their international exchange rates would suggest. Hence exchanging into dollars at the prevalent exchange rate tends to understate the actual size of these economies. To overcome this, Purchasing Power Parity (PPP) rates are devised by comparing prices of a similar basket of goods and services in different countries. Expressed in PPP dollars, the Indian economy is the world’s third largest. But at per capita levels, we are still far below other economies.